June 4, 2021 [Oil Price] – The African nation of Namibia has never produced a barrel of oil in its history. Now, for the second time in less than two months, it’s received positive signs that it could be home to 120 Billion barrels of oil generated in its giant Kavango basin.
The small-cap explorer that’s bringing in the good news for Namibia is Reconnaissance Energy Africa (“Recon Africa”) (TSXV:RECO, OTC:RECAF), and its stock spiked last week after it encountered evidence of oil and gas for a second time and made an impressive commitment to ESG.
On April 15th, Recon Africa announced the results of its first of three drills (6-2), showing evidence of an active petroleum system.
Not only did the results point to indicators of an active petroleum system in this nearly 9-million-acre basin, but also provided 200 meters of oil and natural gas indicators/shows over three discrete intervals in a stacked sequence of reservoir and source rock.
Then, on June 3rd, RECO gave investors another reason to be excited, when the first section of its second well (6-1) provided further confirmation of a working petroleum system. At shallow depths, the well encountered 134 meters of light oil and gas.
The second well is 16 kilometers from the first well and is in the same sub-basin.
“In these first two wells, the many oil and gas shows, with such variety, is certainly remarkable. It is highly encouraging to see clastic and thick carbonate sections which appear to have similar reservoir characteristics as observed in many other petroleum provinces,” ReconAfrica director Dr. Jim Granath said in a statement.
With intermediate casing operations now complete and drilling on schedule, Recon Africa (TSXV:RECO, OTC:RECAF) expects to finish drilling its 6-1 well by the end of this month.
The company also announced its commitment to allocate a minimum of CA$10 million of ESG expenditures to the Kavango region in which it operates.
The anticipation appears to have increased excitement around the stock since mid-April when early results and indications of a working petroleum system in the giant Kavango basin came as a surprise to many. The anticipation for us is now palpable.
Stock forums look to be buzzing… particularly since the rights to this huge basin, the size of Belgium, belong to a small-cap explorer that appears to have significant potential and cash in the bank…
Spencer Hohan, a petroleum engineer, commented on Yahoo:
“As a Petroleum Engineer of 40 years now, having spent a career with major oil companies, and smaller independents, it’s hard to emphasize how rare it is for some like this to be a ‘hit’ on the first penetration well drilled based primarily on a geomagnetic survey. This is astounding. If the second well shows anywhere near similar geophysical properties, and further confirms the basin structure, this could easily be worth more than a hundred times its current price. Sorry, shorts. You’d best cover today, or you are bankrupt. And it may be too late already.”
Doug, an early investor, commented on Yahoo:
“So far, so good, not only in exploration success, but also good will and investment in the people of Namibia. I invested in RECAF in October, 2020 at 0.7138. I then invested for 3 of my grandkids and showed them the company video to give them background on the oil exploration and talk about a company helping the community and country. Good companies not only make profit, they help people prosper. From what I can see, well done, team RECAF, well done.”
We think that retail investors may just have found their favorite new stock.
The Fast-Paced De-Risking of Our Pick For The Onshore Oil Play of the Decade
When the first results came in April, Dan Jarvie – Recon Africa’s geochemist and advisory board member – confirmed the results as showing indicators of the existence of a working petroleum system, stating:
“These shows are indicative of migrated, thermogenic petroleum and occur over three different intervals in the 6-2 test well. The intervals penetrated include highly porous, permeable sediments and marine source rocks as predicted, and extensive marine carbonate lithofacies. Mud gas results indicate a high BTU gas with the presence of light oil in numerous cutting samples. Based on these initial results, the components and processes for a working petroleum system are all present.”
The Namibian government, too, felt there was cause for excitement.
Promising results could put Namibia on the world’s oil exploration map in a very positive way.
“This is great news for the people of Namibia, with the results of the well confirming a big potential for a very valuable energy resource for our country and therefore a significant development for Namibia onshore exploration efforts,” Hon. Tom Alweendo, Namibian Minister of Mines and Energy, stated in a press release. The positive results of this well have provided us with the critical information required to unlock the country’s petroleum prospectivity and is the first step in the process of locating significant accumulations, we can now confidently confirm Namibia is endowed with an active onshore petroleum basin.”
And it just keeps getting better.
The Kavango basin is over 8.5 million acres and as deep as the Permian basin in Texas.
That’s a huge basin for a small-cap company, but it’s fully funded for a 6-well drill and extensive seismic campaign, and we think it’s so far proven that it has what it takes with its experienced team.
When Kavango started coming to the attention of some investors a few years ago, geologist and geophysicist Bill Cathey, who has worked with many of the oil and gas supermajors, commented about the basin: “nowhere in the world is there a sedimentary basin this deep that does not produce commercial hydrocarbons.”
To put things into perspective, late last year, Dan Jarvie provided what he called a “conservative” estimate of Kavango’s potential based on only 12% of Recon’s holdings.
He estimated the basin could have generated 120 billion barrels of oil equivalent.
In November, Haywood Securities initiated coverage on RECO (TSXV:RECO, OTC:RECAF), saying that a discovery success would present manifold opportunities for strategic joint ventures for further de-risking–without additional shareholder dilution.
A month later, Haywood adjusted their evaluation, noting that results showing evidence of the presence of a working hydrocarbons system, “should provide abundant opportunities for further exploration and appraisal drilling”.
Even without the recent positive first drill results showing indicators of a petroleum system, Haywood appeared to see material upside as Kavango may be de-risked:
Haywood’s adjustment also coincided with an analogous report from Wood Mackenzie, comparing RECO’s Kavango basin to the enormous (Permian aged) Midland Basin in Texas. The Midland basin’s estimated development value is $540 billion.
In April, when RECO (TSXV:RECO, OTC:RECAF) released its first results, Haywood raised its price target.
Shortly afterward, in May, ReconAfrica announced a C$25-million bought deal financing with Haywood.
Now, Haywood has adjusted its short term price target on RECO upwards, saying the company “has all the ingredients to establish the existence of a working hydrocarbon system (in a relatively short cycle time) and subsequently evaluate and exploit the potential of the Kavango Basin”.
That includes “a fully-funded six well drilling and extensive seismic program, nearly 100% working interest in acreage across a vast, relatively straightforward land access, an owned drilling rig, a committed and capable management and technical team, stable governments with attractive fiscal terms and proven commitment to responsible development” … among other things.
So now, the important question is whether it’s too late for investors to grab onto this opportunity. We don’t think so.
Year-to-date, RECO (TSXV:RECO, OTC:RECAF) is up approximately 377%.
There is a sizable amount of risk here. As Haywood notes, this is a high-risk/high-reward oil play. If the exploration fails, it could disappoint investors. But if it continues to find indicators of the existence of oil and its economic viability, we think it stands to have very exciting potential because this is a junior explorer sitting on a super-major size play.
The drivers of further upward movement in the near future include, most urgently, the completion of drill no. 2 by the end of this month, and the full analysis of all results from the wells 6-1 and 6-2 which are anticipated at the end of July.
From the first well (6-2) over 150 sidewall cores have been taken to Core Labs in Houston and 37 sidewall cores are on their way there as well from the shallower section of the second well (6-1).
And we think there are plenty more drivers further out …
We’re talking about a basin the size of Belgium, the rights to which are owned by a small-cap explorer with experienced geologists and cash to potentially go even beyond a six well drill campaign. If this continues, and it’s economically viable, it may enter JV territory, when investors could be rewarded for having jumped in on what could end up being the last major onshore oil discovery the world ever sees.
Other oil companies to watch as crude prices continue to climb:
Royal Dutch Shell (NYSE:RDS.A) has one of the most well-known brands in the world. The company is based in Holland, where it was founded over a century ago and employs almost 100,000 people. It’s also one of the biggest oil companies on the planet with operations in more than 90 countries around the world. Yet despite Shell’s size and reach, it still faces plenty of challenges as it tries to meet worldwide demand for energy sources while balancing environmental concerns.
Despite being one of the largest names in Big Oil, Shell is no stranger to the oil and gas game in Africa. In fact, the Dutch oil giant began drilling in the region in the 1950s, and now has assets in over 20 countries across the continent. Though it has sold off a number of assets in the region in recent years, it continues to maintain a strong presence in South Africa, in particular.
Shell’s South African assets are key because the government has been significantly more stable than some of the other big bets on the continent. Moreover, it’s been very supportive of Shell in its endeavors in the country. Its operations in South Africa include retail and commercial fuel, lubricant, chemical and manufacturing.
BP (NYSE:BP) also known as British Petroleum, is a multinational energy company that has been around for over 100 years. BP was formed in 1909 by the merger of two rival companies- Anglo-Persian Oil Company and Royal Dutch Shell. With operations in more than 80 countries and regions, BP is one of the world’s largest oil and natural gas producers.
BP is another European energy giant slowly pivoting towards greener energy alternatives. BP, which has been criticized in the past as being slow and late to the environmental cause, could now leapfrog its peers. We are still a long way from Beyond Petroleum. But chief executive Bernard Looney believes that we are only 30 years from a net zero BP. He has promised that in September the company will lay out a more detailed plan that shows the path to that destination. But he has shown already that there is more to his commitment to net-zero than there was to Beyond Petroleum 20 years ago.
“Renewables and natural gas together account for the great majority of the growth in primary energy. In our evolving transition scenario, 85% of new energy is lower carbon,” Spencer Dale, BP group chief economist, said, commenting on the outlook to 2040.
Chevron (NYSE:CVX) is a multinational oil and gas company. It was founded in 1879 in California by John D. Rockefeller and partners as the Standard Oil Company of Ohio, which became part of the Standard Oil trust when it was dissolved on January 1, 1911. One year later, Chevron Corporation (then Texaco) bought out its former partner for $10 million ($2 billion today). The new corporation then changed its name to reflect this shift from being primarily an oil refining business to one also involved in natural gas exploration and production.
Chevron also has significant presence in Africa, particularly in Nigeria and Angola. In fact, the supermajor ranks among the top oil producers in the two African nations. Other areas on the continent where the company holds interests include Benin, Ghana, the Republic of Congo and Togo. Chevron also holds a 36.7 percent interest in the West African Gas Pipeline Company Limited, which supplies Nigerian natural gas to customers in the region.
While its interests are spread out among the continent, it’s all strategic. With bets on both oil and natural gas, Chevron is looking to take advantage of both of the fossil fuels. Though prices are still depressed at the moment, as fuel demand returns to normal, Chevron could be a big winner in as prices climb back up to pre-pandemic levels.
Baker Hughes (NYSE:BKR) is the world’s largest oil field services company. They provide drilling, completion, production, and reservoir management products and services to customers in more than 100 countries around the world. Founded in 1919 as Geophysical Services Inc., Baker Hughes has grown into a global corporation with operations in over 120 locations across 30 countries.
It’s not ignoring the renewable push either. Baker Hughes risen to the call-to-arms. Surprisingly, however, it wasn’t investor pressure that got Baker Hughes into the hydrogen boon. In fact, it’s been in the game for well over half a century. It built its first hydrogen compressor in 1962 and hasn’t stopped since.
Because it’s still primarily an oil field service company, however, Baker Hughes has had its share of ups and downs over the past year, but the $27 billion industry giant still remains a smart buy for long-term investors. Not only has it shown that it can adapt to the times, but it also pays dividends!
Demand for the sweet crude oil grades produced by Brazil’s pre-salt oilfields has exploded in recent years, and Petrobras (NYSE:PBR), being focused on developing its pre-salt operations is set to be one of the industry’s biggest winners. Brazil’s national oil company has budgeted capital spending for exploration and production activities of $46.5 billion from 2021 to 2025. Those upstream projects being approved for development must have a breakeven price of $35 per Brent or less.
Clearly, while the pandemic has hit Brazil’s oil industry causing production to fall because of savage budget cuts and well shut-ins, it appears to have done no material long-term damage. Demand for Petrobras’ low sulfur content fuel is firm and will grow because of the global push to significantly reduce sulfur emissions.
Even old-school fossil fuel producers are getting in on this race. Suncor (NYSE:SU, TSX:SU) might be known mostly for its oil production. But it’s one of the few majors really pushing the boundaries. In fact, it has pioneered a number of high-tech solutions for finding, pumping, storing, and delivering its resources. When the rebound in crude prices finally materializes, giants like Suncor are sure to do well out of it. While many of the oil majors have given up on oil sands production – those who focus on technological advancements in the area have a great long-term outlook. And that upside is further amplified by the fact that it is currently looking particularly under-valued compared to its peers.
But that’s just one part of its business, however. Suncor is also a world leader in renewable energy innovations. Recently, the company invested $300 million in a wind farm located in Alberta. Additionally, as Canada moves away from oil, Suncor is well positioned to take advantage of another one of the country’s resource reserves; Lithium. The best part? It doesn’t even have to move very far. In fact, Alberta’s oil sands are a major hotspot for lithium production.
Asia isn’t going to be left behind in the oil race. In fact, as demand for energy continues to explode in a post-pandemic China, CNOOC Limited (NYSE:CEO, TSX:CNU) will likely be one of the biggest benefactors. It’s the country’s most significant producer of offshore crude oil and natural gas and may well be one of the most controversial oil stocks for investors on the market. A label that has nothing to do with its operations, however.
It is still unclear how the growing antipathy between China and the United States will affect America’s natural gas sector, given that CNOOC is China’s largest importer of LNG. But as the Biden Administration grapples with some of the geopolitical missteps of the previous administration, Chinese companies, including CNOOC, are likely to breathe freely once again, and it could be a boon for Chinese stocks. Enbridge (TSX:ENB) is in a unique position as oil and gas stages its 2021 comeback. As one of the more potentially undervalued companies in the sector, it could be set to win big this year. But that’s only if it can overcome some of the challenges in its path. Most specifically, its Line 3 project which has faced scrutiny from environmentalists.
While this challenge may prove difficult for Enbridge to overcome, the health of the Canadian oil industry is improving, and with it, the outlook for Canadian producers such as Enbridge. The company has already started the year off strong, and if it can continue its momentum, it will likely be able to see a sustained rally in its share price over the course of the year.
Cenovus Energy (TSX:CVE) is most known for its oil business, but it is also actively investing in renewable energy. More importantly, however, is that it has set truly ambitious sustainability goals for itself, aiming to cut emissions by a massive 30% in just 10 years.
This is one of the most actively traded stocks on the TSX. The potential is certainly here for this oil company, so for investors who are bullish on the return of the oil markets, this is a perfect pick in the Canadian market.
Tourmaline Oil Corp (TSX:TOU) is another Canadian resource producer focusing on exploration, production, development and acquisition within Western Canadian Sedimentary Basin. The company is in possession of an extensive undeveloped land position with long-term growth opportunities and a large multi-year drilling inventory. Tourmaline’s strong leadership make the company a promising pick for investors looking to take advantage of the tremendous Canadian oil opportunities which are due for a strong rebound as oil prices inch higher.
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